Busting the Annuity Myths: My Interview with Tom Hegna (Part 2)

the power of zero

If you have a history of premature death or cancer in your family you may still be a good candidate for an annuity. If your spouse has longevity it can still be a good option. Even if you’re not in the best health there are still annuity products with certain features that can still make sense.

Some people always want to have control of their money, but they have to realize that an annuity is not giving up control, it’s about taking control over your risk.

Annuities give you control over longevity risk, the risk of deflation, withdrawal and the sequence of returns risks. You’re simply taking key risks off the table. The people who buy annuities are the people that want to have control of their future. Annuities are not meant for all of everybody’s money. Most people should put 20% to 40% of their portfolio into annuities. If they did that it would solve most people’s retirement issues.

Life insurance is a great bond substitute for younger people, once you’re 65 and above you can replace it with some time of income annuity. The way an income annuity functions inside a portfolio are like a triple A-rated bond with a triple C rated yield and zero standard deviation. This makes them a much better alternative to bonds.

Most people don’t realize that they can lose half their money in a government bond because of the risk of interest rates rising, which is a risk that’s not present in life insurance and annuities.

You aren’t getting any younger and you can’t take your money with you. This means you are supposed to spend your principal. If you have life insurance in place it allows you to spend your money guilt-free in a way where everyone wins.

Annuities are ordinary income, but most people overestimate the amount of capital gains they are receiving. If you’re in a mutual fund or managed money account, a lot of the time it’s actually ordinary income because of the turnover within the fund.

When it comes to the stepped-up cost basis the only area that applies is in unrealized capital gains. Most people think the stepped-up cost basis applies to their whole account but they actually paid for it in taxes for all the years they have it.

It doesn’t matter whether it’s Republicans or Democrats, both parties spend like drunken sailors. Both parties are spending too much and borrowing to pay for everything.

If you look at Modern Monetary Theory closely it only works as long as interest rates are low. Once interest rates start to rise they advocate for slashing spending very strictly which is the source of the problem. We are always willing to take the easy road (spending) but we’re not willing to do the hard things (cutting expenses).

It’s hard to predict where the economy is headed over the next ten years because of the crazy amounts of unprecedented money printing recently. 1 out of every 5 dollars in America’s history were printed in the last 12 months.

They can keep printing money in the short-term but they can’t do it indefinitely. Tom believes that at some point in the next ten years taxes will go, the market will crash, and there are good odds of another great depression-style event.

People need to move from the mindset of building wealth to protecting wealth, and that’s what life insurance and annuities can do. Another interesting point is that in the state of Arizona, the money you put into annuities is protected from lawsuits. Protecting your wealth is more important than building your wealth.


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